How Online Checking Accounts Work

One major difference with online checking accounts is that many of them will pay interest, while interest-bearing checking accounts are rarer at old-school banks [source: Todorova].The different types of online checking accounts are just as varied as the different types of checking accounts that you can get at a more traditional bank. You can find familiar account types, like free checking or business checking accounts or some more unusual account types.

One unusual account is for people with credit problems: the "prepaid card account." These accounts are basically a prepaid debit card that you can refill, but it acts like a bank account. For example, you can still set up direct deposit into your prepaid card account and even write checks [source: iBank Up]. Some banks specialize in what's known as "second chance" online checking accounts. Aimed mostly at people with bad credit or who are in the Chex System for writing too many bad checks, these usually have more fees attached but can help customers rebuild credit [source: Zhen]. If you're in better financial shape, you might look at rewards checking accounts. Rewards accounts offer even higher interest rates than other interest-bearing online checking accounts, but you usually have to meet more criteria to qualify, like a certain number of debit card purchases each month [source: Ken].

Different banks have different procedures for opening an online account, but if you're going to be doing your banking online, there are a few things that are pretty standard. Web site. You'll need to provide information like your full name, date of birth, social security number, and a form of identification. Many online applications use your driver's license number instead of the real deal. You'll also need a valid email address, since this is most likely how the bank will communicate with you. If you already have account through a brick and mortar bank, you simply register for online access to your bank account, and provide a username and password.

If your new account is strictly online, you'll need to deposit money to open the account, either through a transfer from your current bank, with a check card, or via a check or money order that you mail to the bank. The amount of that initial deposit varies, depending on the bank you choose and the sort of account you open.

Online checking accounts offer a few features that aren't always available with a typical checking account. We'll talk about what perks to expect from online banking on the next page.

Online checking accounts have many of the same features as more conventional accounts, but there are a few special features that come only with online checking.

"Online bill pay" is a common feature with online checking accounts. Instead of using a payment system or sending checks to your creditors through the mail, you can transfer the funds electronically through your bank, using funds in your online checking account [source: Nationwide]. The beauty of online bill pay is that you can avoid the cost of stamps and any fees from third-party payment programs that many companies and utilities use to accept your monthly payments. The money will also be delivered to the creditor usually in one or two days, as opposed to the five to seven days when a check is mailed.

Some online accounts offer rewards programs tied to debit cards too. Not to be confused with a rewards checking account, these programs allow you to earn points for purchases and redeem them for goodies [source: Wang].

One of the major drawbacks with online-only banks is that it can take much longer to deposit a check. Without a physical location or ATMs, the only option used to be mailing any checks you receive to a central depository. However, many banks, both online and traditional, now offer "mobile deposits" to make depositing checks much faster. Using the bank's smartphone app, you snap a photo of the check you need to deposit, and the bank uses the image to deposit the funds for you [source: Block]. Of course, there's still a delay as the funds clear, but it's much faster than mailing things in.

Banking online can be convenient, but there will be times when you need access to cash. Because online-only banks don't have physical locations, they'll often offer ATM fee reimbursements. Usually, they'll only reimburse a certain number of transactions each month. Fee reimbursement is becoming so common that even banks with brick and mortar locations are starting to follow suit [source: Wang].

How do you manage your money in an online account, and is your money safe there? We'll look at how deposits, transfers, and security work on the next page.

To get money into your online account, you've got a few options. Most people are already familiar with direct deposit: Instead of receiving a check from your employer or payee, you give them routing information, so they can deposit your money directly into your bank account. You can also deposit checks by taking a photo of them with your smartphone [source: Block]. If you're depositing cash, you can either buy a money order and mail it in or deposit the cash into a traditional bank account and transfer the money.

Got more than one online account? One area where online banking is very convenient is transfers. With an online account, you can do it with just a few clicks on the bank's Web site(s). If you're trying to move the money from one bank account to another you can transfer between accounts at the same bank for free. If you're transferring money to another bank, you may have to pay a transaction fee [source: HSBC].

Even if you do most of your transactions online, from time to time you're going to need checks. Online only banks do offer paper checks. Some will send you a checkbook, while with others you fill out your check online, and they mail the paper check to the payee for you.

Whether you're depositing, withdrawing, or moving your money around, you want to be sure that your online checking account is safe and secure. As with anything online, security is a concern, and there are hackers out there who try to get into online bank accounts. Banks use heavy 128-bit encryption to protect customers from getting hacked, and while banks do sometimes have their databases compromised, it's a relatively small number compared to how many customers bank online. Even then hackers don't always get all of the information they need to steal your identity [source: Nicholson].

You actually have a lot of the control over your account's security. Here are a few ways to make sure your online banking stays safe: